Following a consultation on the Buy-to-Let market earlier this year, the Prudential Regulation Authority has now confirmed it will introduce tougher underwriting criteria, to be phased in from January next year.

The aim is to make sure that borrowers are not over-stretching themselves, and can cope with their mortgage payments as well as the other costs associated with being a landlord.

These costs could include repairs, voids and management fees. Tax liability should also be accounted for, particularly for higher rate taxpayers who will see their tax relief on mortgage interest eroded from next April.

The regulator will require that lenders consider potential increases in interest rates. As a result they will be expected to assume a minimum stress rate of 5.5%, unless the mortgage is fixed for at least 5 years.

A number of lenders have already reviewed their policies and increased their rental requirement, their stress rate, or both. More are likely to follow suit over the coming months, and ultimately this could mean that landlords won’t be able to borrow as much based on rental income.

It’s therefore important for investors to be aware of increasing costs over the coming years and account for these when planning a purchase.